Solution a:
Computation of NPV | ||||||
Project A | Project B | |||||
Particulars | Period | PV Factor (8%) | Amount | Present Value | Amount | Present Value |
Cash outflows: | ||||||
Initial investment | 0 | 1 | $113,000 | $113,000 | $35,000 | $35,000 |
Present Value of Cash outflows (A) | $113,000 | $35,000 | ||||
Cash Inflows | ||||||
Annual cash inflows | 1-4 | 3.31213 | $43,651 | $144,578 | $12,012 | $39,785 |
Present Value of Cash Inflows (B) | $144,578 | $39,785 | ||||
Net Present Value (NPV) (B-A) | $31,578 | $4,785 |
Project A should be accepted based on NPV.
Solution B:
Computation of IRR | ||||
Period | First investment | Second investment | ||
Cash Flows | IRR | Cash Flows | IRR | |
0 | -$113,000.00 | 20.00% | -$35,000.00 | 14.00% |
1 | $43,651.00 | $12,012.00 | ||
2 | $43,651.00 | $12,012.00 | ||
3 | $43,651.00 | $12,012.00 | ||
4 | $43,651.00 | $12,012.00 |
Project A should be accepted based on IRR.
Dwight Donovan, the president of Perez Enterprises, is considering two investment opportunities. Because of limited resources,...
Dwight Donovan, the president of Perez Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of three years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $115,000...
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